Chris Whalen: Cheap Credit Is Over, K-Shaped Economy Becoming an L, Long Energy & Short Financials

Whalen says affordability was already a political concern before the Iran war and argues that official inflation measures may understate what many people experience, which he puts at mid- to high-single digits. He also says consumers are cutting spending and shifting toward discount stores, while restaurants have little choice but to pass cost increases through because their net margins are typically in the single digits.

Whalen expects inflation and Treasury borrowing demand to keep upward pressure on rates: after a 29,000-job report versus 90,000 expected, yields fell but remained elevated, and he says the Fed may hold rates in October and possibly raise them in November. He warns that rates could reach double digits without a different approach to the deficit and the economy, and expects long-term Treasury rates to reflect inflation expectations and slow the economy; he presents the double-digit outcome as a risk, not a certainty.

Whalen expects credit stress to emerge first at higher-risk lenders such as Synchrony and Capital One, before reaching mainstream banks such as JPMorgan; he notes that Synchrony writes off 5% of total loans each quarter and charges close to 20% on its credit cards. He also expects subdued bank earnings as Wall Street activity cools, says third-quarter results will show whether credit costs are rising, and anticipates defaults and restructurings in private credit and private equity.